PRODUCT AND SERVICE COSTING:
A PROCESS SYSTEMS APPROACH
AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:
1.Describe the basic characteristics of process costing, including cost flows, journal entries, and the cost of production report. 2.Describe process costing for settings without work-in-process inventories. 3.Define equivalent units, and explain their role in process costing. 4.Prepare a departmental production report using the FIFO method. 5.Prepare a departmental production report using the weighted average method. 6.Prepare a departmental production report with transferred-in goods and changes in output measures. 7. Describe the basic features of operation costing.
8. Explain how spoilage is treated in a process costing system.
THIS CHAPTER INTRODUCES THE PROCESS COSTING SYSTEM DESIGNED FOR COMPANIES THAT PRODUCE LARGE NUMBERS OF HOMOGENEOUS PRODUCTS PASSING THROUGH A SERIES OF PROCESSES. IT ALSO EXPLAINS WHY PROCESS COSTING CAN BE USED IN THE SERVICE INDUSTRY AND JIT MANUFACTURING FIRMS. WHEN WORK-IN-PROCESS INVENTORIES ARE PRESENT, EQUIVALENT UNITS MUST BE USED TO MEASURE OUTPUTS. NOTE THAT TWO DIFFERENT METHODS (FIFO OR WEIGHTED AVERAGE) CAN BE USED TO HANDLE THE PRIOR-PERIOD WORK AND PRIOR-PERIOD COSTS ASSOCIATED WITH THE BEGINNING WORK-IN-PROCESS INVENTORIES. IN ADDITION, THE OPERATION COSTING IS PRESENTED AS A HYBRID SYSTEM FOR THOSE MANUFACTURING ENVIRONMENTS THAT HAVE BOTH JOB AND PROCESS CHARACTERISTICS.
I.PROCESS COSTING SYSTEMS: BASIC OPERATIONAL AND COST CONCEPTS Process costing systems are designed to assign costs to a large number of homogeneous products passing through a series of processes. Each process performs specific activities that bring a product closer to completion. Thus, a process is a series of activities (operations) that are linked to perform a specific objective. A.Cost Flows
1.The cost flows in a process cost system are tracked and accumulated by process. Each process, thus, will have a separate WIP account to track manufacturing costs. 2.When goods are completed in one process, they are transferred with their costs to the subsequent process. 3.Costs transferred from a prior process to a subsequent process are referred to as transferred-in costs. The costs of goods being transferred into a process can be considered a type of “raw material” cost that is added at the beginning of the process.
Review textbook Exhibit 5-2, which illustrates the different cost accumulation approaches between job-order costing and process costing systems.
Review textbook Exhibit 5-3, which compares the job-order costing and process costing by focusing on the cost flows through different work-in-process accounts.
B.The Production Report
1.In process costing, the production report summarizes the manufacturing activity within a process for a given period of time. The report also serves as a source document for transferring costs from the WIP account of a prior process to the WIP account of a subsequent process. 2.A production report traces the flow of units through the process, identifies the costs charged to the process, shows the computation of unit costs, and shows the disposition of the costs of the process for the period. C.Unit Costs
1.The calculation of unit costs in a process system involves: ■ Computing the manufacturing costs for a process department for a given time period.
■ Computing the output in units of the process department for that same time period.
■ Calculating the unit cost by dividing the costs of the period by the units produced during the period. That is, each unit in each process receives a similar share of...